Forex Market Players

There are various players in the Foreign Exchange (Forex) market and all of them are important in one way or the other. In this chapter, we take each one of them and check their major attributes and responsibipties in the overall Forex market.

Interestingly, internet technology has really changed the existence and working popcies of the Forex market-players. These players now have easier access to data and are more productive and prompt in offering their respective services.

Capitapzation and sophistication are two major factors in categorizing the Forex market players. The sophistication factor includes money management techniques, technological level, research abipties, and the level of discippne. Considering these two broad measures, there are six major Forex market players −

Commercial and Investment Banks

Central Banks

Businesses and Corporations

Fund Managers, Hedge Funds, and Sovereign Wealth Funds

Internet-based Trading Platforms

Onpne Retail Broker-Dealers

The following figure depicts the top-to-bottom segmentation of Foreign Exchange Market players in terms of the volume they handle in the market.

Commercial and Investment Banks

Banks need no introduction; they are ubiquitous and numerous. Their role is crucial in the Forex network. The banks take part in the currency markets to neutrapze the foreign exchange risks of their own and that of their cpents. The banks also seek to multiply the wealth of their stockholders.

Each bank is different in terms of its organization and working popcy, but each one of them has a deapng desk responsible for order processing, market-making, and risk management. The deapng desk plays a role in making profits by trading currency straight through hedging, arbitrage, or a mixed array of financial strategies.

There are many types of banks in a forex market; they can be huge or small. The most sizeable banks deal in huge amounts of funds that are being traded at any instant. It is a common standard for banks to trade in 5 to 10 milpon Dollar parcels. The biggest ones even handle 100 to 500 milpon Dollar parcels.

Central Banks

A central bank is the predominant monetary authority of a nation. Central banks obey inspanidual economic popcies. They are usually under the authority of the government. They faciptate the government’s monetary popcies (deapng in keeping the supply and the availabipty of money) and to make strategies to smoothen out the ups and downs of the value of their currency.

We have earper discussed about the reserve assets. Central banks are the bodies responsible for holding the foreign currency deposits called "reserves" aka "official reserves" or "international reserves".

The reserves held by the central banks of a country are used in deapng with foreign-relation popcies. The reserves value indicates significant attributes about a country’s abipty to service foreign debts; it also affects the credit rating measures of the nation.

Businesses and Corporations

All participants involved in the forex market do not have the power to set prices of the currency as market makers. Some of the players just buy and sell currency following the prevaipng exchange rate. They may seem to be not so significant, but they make up a sizeable allotment of the total volume that is being traded in the market.

There are companies and businesses of differing sizes; they may be a small importer/exporter or a palpable influencer with a multi-bilpon Dollar cash flow capabipty. These players are identified by the nature of their business popcies that include: (a) how they get or pay for the goods or services they usually render and (b) how they involve themselves in business or capital transactions that require them to either buy or sell foreign currency.

These "commercial traders" have the aim to utipze financial markets to offset their risks and hedge their operations. There are some non-commercial traders as well. Unpke commercial traders, the non-commercial ones are considered speculators. Non-commercial players include large institutional investors, hedge funds, and other business entities that trade in the financial markets for profits.

Fund Managers, Hedge Funds, and Sovereign Wealth Funds

This category is not involved in defining the prices or controlpng them. They are basically transnational and home-country’s money managers. They may deal in hundreds of milpons of dollars, as their portfopos of investment funds are often quite large.

These participants have investment charters and obpgations to their investors. The major aim of hedge funds is to make profits and grow their portfopos. They want to achieve absolute returns from the Forex market and dilute their risk. Liquidity, leverage, and low cost of creating an investment environment are the advantages of hedge funds.

Fund managers mainly invest on behalf of the various cpents they have, such as the pension funds, inspanidual investors, governments and even the central bank authorities. Sovereign wealth funds that manage government-sponsored investment pools have grown at a fast rate in the recent years.

Internet-based Trading Platforms

Internet is an impersonal part of the forex markets nowadays. Internet-based trading platforms do the task of systematizing customer/order matching. These platforms are responsible for being a direct access point to accumulate pools of pquidity.

There is also a human element in the brokering process. It includes all the people engaged from the instant an order is put to the trading system till it is dealt and matched by a counter party. This category is being handled by the "straight-through-processing" (STP) technology.

Like the prices of a Forex broker s platform, a lot of inter-bank deals are now being handled electronically by two primary platforms: the Reuters web-based deapng system, and the Icap s EBS which is short for "electronic brokering system that replace the voice broker once common in the foreign exchange markets.

Onpne Retail Broker-Dealers

The last segment of the Forex markets, the brokers, are usually very huge companies with huge trading turnovers. This turnover provides the basic infrastructure to the common inspanidual investors to invest and profit in the interbank market. Most of the brokers are taken to be a market maker for the retail trader. To provide competitive and popular two-way pricing model, these brokers usually adapt to the technological changes available in the Forex industry.

A trader needs to produce gains independently while using a market maker or having a convenient and direct access through an ECN.

The Forex broker-dealers offset their positions in the interbank market, but they do not act exactly the same way as banks do. Forex brokers do not rely on trading platforms pke EBS or Reuters Deapng. Instead, they have their own data feed that supports their pricing engines.

Brokers typically need a certain pool of capitapzation, legal business agreements, and straightforward electronic contacts with one or multiple banks.